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November 27, 2000

IT Impact
E-Marketplaces Think Vertical

Vertical extension—the addition of specialized services—will drive the next wave of E-marketplaces

Columnist_name s competition intensifies in the market for online trading hubs, marketplace operators know they must extend their offerings to provide more than just commerce capabilities. To attract and keep trading partners, they must expand their value.

We're already seeing the addition of horizontal capabilities such as personalization, communities of interest, portal capabilities, and handling of requests for quotes and requests for proposals. Such capabilities provide value for buyers and sellers beyond just transaction support while enabling marketplace operators to embed themselves more deeply in their trading partners' relationships with each other.

But it's vertical extension--the addition of specialized services--that will drive the next evolution of E-marketplaces. Vertical enhancements include add-on services that let the marketplaces control the end-to-end trading cycle. Such services will focus on fulfillment, settlement, and returns processing. Companies in vertical industries, such as banking, financial services, insurance, and shipping, all have a vested interest in getting their piece of E-marketplace trade.

Think of all the financial services that would simplify life for E-marketplaces and their trading partners. For example, E-marketplaces need credit validation services to verify that buyers have sufficient funds available to back their purchases before allowing them to submit a purchase order. Likewise, in many cases there is a need to create escrow accounts to hold goods until funds are actually received.

Another key area is cash management. Marketplaces need lines of credit for operating capital and to expand their businesses. They could extend lines of credit to a buyer in order to settle the buyer's account with a seller, while charging the buyer interest or fees for the advanced funds. Sellers are interested in receiving payment quickly, and the marketplace could guarantee timely settlement for a fee, of course.

Then there's shipping, fulfillment, and return processing. Many low-tech trading partners don't have the sophisticated infrastructures needed to handle these functions, so marketplaces must take on more responsibility for delivery and returns. Insurance can also play a role here, as marketplaces provide insurance on shipments or returns for orders originating from their sites.

Finally, invoicing, bill presentment, and payment are key services for marketplaces. If buyers and sellers use a marketplace for trade, it's logical for them to use it as the conduit for invoicing and payment processing. Again, this represents not only a value-added service for marketplaces but another opportunity to make money on the service.

This vertical services trend will apply not only to dot-com marketplaces but brick-and-mortar companies that are adding E-marketplaces to expand their businesses. For any marketplace, the challenge lies in integrating all of these services into their offerings.

And the choices for marketplaces are changing. Of course, marketplaces can always strike partnerships with service providers and attempt to integrate them into their existing infrastructures. This poses plenty of technical challenges, not to mention the business challenges of forming multiple partnerships and making bets on which partners will be successful over time. With this approach, switching costs are extremely high.

Knowing this, we expect the vertical service firms to jump into the market with packaged offerings. Likewise, insurance, shipping, logistics, and inventory management providers will likely provide bundled offerings of technology and services. For example, UPS Capital is building a B-to-B E-billing consolidation service that will also provide cash management services and an electronic lockbox.

Clearly, the scope of services that marketplaces will offer is poised for explosion. This means that marketplaces can offer more compelling hubs and can provide end-to-end commerce capabilities, something that's particularly appealing for low-tech trading partners that are hesitant to spend big bucks on building their own E-commerce infrastructures.

The key to success is choosing the right partners to create a compelling package, while keeping it simple enough for marketplaces to justify their investments.

Jeetu Patel is VP of research with Doculabs, an independent advisory firm that helps companies choose the right technologies and strategies for E-business. He can be reached at info@doculabs.com.

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